What is Invoice Factoring?

Summary: Invoice factoring is a type of debtor financing that allows a company to finance its accounts receivable ledger. This financing is often used by companies that have cash flow problems because their clients pay invoices in net-30 to net-60 day terms.

Factoring has been gaining popularity in Australia as a way to finance small and medium-sized businesses. This article covers the following:

1. Are your clients paying in 30 to 90 days?
2. Finance your invoices
3. How does invoice factoring work?
4. Qualification requirements
5. Advantages
6. How long do they take to be set up?
7. Industries suited for factoring

1. Are your clients paying you in 30 – 60 days?

One of the problems of working with large businesses is that they often demand payment terms. Your company must give them 30 to 60 days to pay an invoice. Usually, there is little room for negotiation on this matter. If you don’t provide payment terms, prospective clients will go to one of your competitors who will.

However, offering payment terms places a financial burden on small and medium-sized companies. Many cannot afford to wait up to two months to get paid. They need money sooner to pay suppliers, wages and other expenses.

2. Finance your invoices

You can solve this problem by using invoice factoring. The programme allows you to finance your slow-paying invoices. This financing provides your business with immediate funds, which you can use to pay expenses. When used correctly, a factoring plan provides financial stability and a platform for growth.

3. How does invoice factoring work?

Most invoice factoring plans finance invoices in two payments. The first payment is called the advance. The second payment is often called the rebate.

Transactions are structured using this format:

1. Your company raises an invoice and submits it for financing
2. The factoring company advances the first payment – 80% of the invoice
3. Your client pays the invoice 30 to 60 days later
4. The finance company rebates the remaining 20%, less service fees

The factoring advance ranges between 80% and 90% of the invoice, though 80% is the usual advance. Companies with a good track record and dependable clients may qualify for higher advances.

4. Who qualifies?

The most important requirement to qualify for factoring is to have creditworthy clients who pay their invoices when they are due. Additionally, your company should be well organized and free of legal and tax problems.

Factoring is available to small and medium-sized businesses as an alternative to conventional business loans.

5. Advantages of factoring

The most important advantage that your company gets from using factoring is that your cash flow improves, often very quickly. But improved cash flow is not the only benefit. The factoring facility is designed with future growth in mind and it increases as your sales to qualified customer grow. This feature is important for small and medium-sized companies that are growing.

6. Fast set up

Most factoring plans can be deployed fairly quickly. Setting up the account takes about two weeks, though this time frame varies. Once an account is set up, invoices can be financed in a day or so.

Factoring invoices can be an ideal tool for companies that have cash flow problems and need immediate funding.

7. What industries are suited for factoring?

In general, factoring can be used when a business is selling a product/service to another company. Factoring is common in the following industries:

Can we help you?

We are a leading invoice factoring company and can provide high advances at competitive rates. For more information, fill out our enquiry form and a representative will contact you soon.